The claim that a healthy economy relies on the private sector to create wealth, while the government merely shifts money around, is a familiar one. But it flips reality on its head. In fact, in a modern economy like Australia’s, it is government spending that provides the money the private sector needs to function in the first place. The private sector doesn’t create the dollars—it simply redistributes dollars that already exist.
Let’s take a step back. Australia issues its own currency. Only the federal government can create Australian dollars. It does this through spending—paying for goods, services, wages, infrastructure, welfare and more. These dollars flow into the economy, and once there, the private sector exchanges them, saves them, invests them and pays taxes with them. But the key point is this: without government spending putting those dollars into the economy, the private sector would have nothing to trade or earn.
Think about it this way. You can’t pay taxes with dollars the government hasn’t already spent into the economy. The dollars have to come from somewhere. The private sector may build houses, make coffee or develop apps, but it can only do so because people have the money to pay for those things—and that money starts with government spending.
When critics point to growth in the public sector as a burden on private workers, they miss the bigger picture. Public sector workers build and maintain the conditions that make private business possible: transport networks, education systems, health services, law and order, and more. Far from being a drain, the public sector is a foundation.
The idea that the private sector “creates wealth” while government merely redistributes it rests on a misunderstanding of how a currency-issuing economy works. The government creates the economic pie through its spending decisions—deciding how big the economy can be at any given time. Private markets then divide that pie, deciding who gets what share.
If we want a growing, healthy economy, the real challenge isn’t to shrink the public sector or wait for the private sector to create wealth from nothing. The challenge is for government to spend wisely—to build the pie in ways that support both fairness and productivity, and allow the private sector to thrive within that.